Retail investors moving into higher-yield stocks

Retail investors have extended their net buying positions from cyclical stocks to now include higher-yield names, according to Commonwealth Bank’s institutional research.

“In October 2012, we noted emerging signs of improving retail investor confidence given the shift in equities asset allocation from defensives into cyclical sectors such as Financials, Consumer discretionary and Materials.

“In the latest November 2012 CommSec data, we note this trend has continued, though net buying positions now also include higher-yielding sectors such as Telcos and Utilities [not surprising given the low interest rate environment]."

CommBank says listed wealth managers are already “well leveraged" to that theme, given they’re sitting on a lot of cash. The broker estimated there was $85 billion of surplus cash in Australia as at the end of June this year, which represents 28 per cent of household financial assets (and above the historical average of 25 per cent).

In November, the RBA said in its statement accompanying its decision to keep interest rates steady at 3.25 per cent that: “Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns."

Some interpreted this as the RBA tacitly encouraging investors to invest in “riskier" assets, like shares because they will continue to ease monetary policy, thereby eroding the returns available on cash, bonds, term deposits and so on.

On the CommSec data, perhaps there is a sign this is starting to take place, with retail investors shifting to cyclical sectors from defensive. However, there’s also buying of high-yield names given the popularity of income in a low global interest rate environment. While this does seem like a sensible strategy, these names are likely to be the first sold if there’s a meaningful improvement in the global outlook. Those names may still be able to deliver a yield better than anything you could receive from a term deposit but your invested capital is clearly going to take a hit as the shares sell off.Yuan’s rising star

The appreciation of China’s currency, the yuan, seemed like such a sure thing it surprised many that expectations for further gains cooled dramatically around the middle of the year. And it could mean more work for the country’s central bank, according to the Peterson Institute for International Economics.

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For most of this year, companies with deposits in Chinese banks have been reluctant to exchange their US dollars for yuan and so the growth in foreign currency reserves was a wet blanket on yuan appreciation.

Accordingly, this meant there was a reduced need for the People’s Bank of China to intervene and slow the currency’s rise. The currency actually depreciated between May and July.

Now corporations are beginning to reduce the growth of their dollar holdings. The growth of foreign currency deposits peaked in June in absolute terms, rising by $US27 billion. Foreign currency deposit growth has since slowed considerably, and in fact deposits even fell for the first time this year in September.

This could signal yuan appreciation is back on the cards. Indeed, from August, the currency started to strengthen against the US dollar, rising to its strongest level since 2005 when its peg with the greenback was lifted, and in fact the highest level back to 1994 when the modern foreign currency exchange system in China was launched.